- Luxembourg-based fund raises $250m for frontier projects
- Paying private investors first makes investments more stable
A green fund established by the European Union has found a way to attract private investors for clean-energy projects in frontier markets and expects the technique may be able to mobilize more than 10 billion euros ($11 billion) for the industry.
The Global Energy Efficiency and Renewable Energy Fund is based in Luxembourg and is said it has already raised 222 million euros for the projects it is backing. It’s being advised by the European Investment Bank.
The strategy is to ensure that private investors receive the first cut of cash flow coming from the projects backed by the fund.
“Our magic trick is to take frontier projects and make them attractive to private investors, its not obvious,” said Cyrille Arnould, head of the Global Energy fund, by phone. “But we’ve been able to mitigate risk.”
The payoffs are made in four steps:
- First, private investors get capital back and 4 percent annualized return. Public investors get nothing during that period.
- Once that target is achieved, public investors get their capital back, and private investors are paid nothing from the cash flows until that’s finished.
- When public-sector investors are paid off, cash flows to the private ones resume until returns reach 10 percent.
- After that, the money is divided up, with the EIB reaping 5 percent and the rest being split proportionally among all those who participated.
The European Commission, Norway and Germany were among the public investors that contributed 112 million euros to the fund. Development banks such as the European Investment Bank, the Netherlands’ FMO, Washington-based International Finance Corp. have also participated, as well as Proparco, a financial institution partially owned by the French Development Agency.
The public institutions are able to do in this because they use funds that are designated for official development aid. It cannot be used for commercial financing, which is why it is able to be used to mitigate risk for the private sector.
Use of Funds
“This is a good way to stretch public funds. For every euro that public institutions spend on development, 65 euros is invested,” said Arnould.
The capital is used to provide equity for clean energy projects in developing countries. The GEEREF invests in 10 private equity funds that develop renewable energy and energy efficiency projects in emerging markets.
To date, it has invested in Africa, Latin America, Central America, Eastern Europe and Southeast Asia. About 50 projects are in development and this volume is expected to double in the next few years, Arnould said.
It is now working to raise 900 million euros for a new fund, with two thirds private capital using this strategy. It’s already in talks with the public investors.
For the next fund, “we’ll stay global in emerging markets because that’s where the growth is especially in the power sector. Renewable energy is well-suited for developing countries,” he said.